USD Swaps: Yields scrape new highs ahead of FOMC

Yields scrape new highs ahead of FOMC

Treasuries are ending the session at the lows of the day, with the 2y note yield 5.099% or 4.3bps higher while the 10y note yield is last 4.365% (+6.2bps) – both new multi-year highs. As for the curve, 2s10s rose +1.7bps to -73.7bps while 5s30s flattened -2.2bps to -8.7bps. Equities ended lower (DJIA -0.31%, S&P -0.13% and Nasdaq -0.23%).

Earlier the $13bn 20y auction drew a record high yield of 4.592%, right on the screws. Indirects (65.4%) fell while directs rose (25.4%), leaving primary dealers with a lower 9.3%. The bid-to-cover came at a strong 2.74x.  

Swap spreads widened out from the morning lows amid lower volumes across the board. IG new issuance (ex-SSA) only saw $1.25bn 3y NC2 preferred from Danske to bring the weekly total to just over $16bn. Meanwhile, the vol surface saw a firming, led by lifts in short expiries on short tails (for more, please see link).

As sources say that the potential buyers of Treasuries are increasingly a concern amid the growing supply, analysts at JP Morgan review the monthly TIC data on foreign transactions and holdings of US securities for July released yesterday:

“Foreign investors purchased $6.5bn long-term Treasuries over the month, the weakest month for demand since April 2022. Indeed the foreign official sector sold $22.4bn of long-term Treasuries over the period, the largest shedding since January 2023, while private investors added $22.6bn of Treasuries, a moderation from $32.8bn in June.”

 

“Demand from ‘International and Regional Organizations’ has continued to remain firm at $6.3bn in July. Investors from the Euro area represented the largest international source of demand for long-term Treasuries in July for the second month in a row, adding $7.1bn over the month, which was roughly evenly split between France and Germany.”

 

“Meanwhile UK and Chinese investors comprised the largest source of net selling shedding $11.6bn and $11.2bn of long-term Treasuries in July. Notably our Chinese research colleagues have recently highlighted a reacceleration in gold purchases in 3Q which they believe may increase further and this may in part reflect SAFE’s (State Administration of Foreign Exchange) efforts to diversify its FX reserve allocations to different asset classes.”

 

“However, it’s also notable that Treasuries held in custody at the New York Fed have declined only modestly since the end of July, and this official selling could reflect shortening duration into an inverted yield curve amid more abundant T-bill supply.”

2s -10.5bps (+0.125bps), 3s -14.25bps (+0.5bps), 5s -21.625bps (+0.25bps), 7s -31bps (+0.25bps), 10s -29.375bps (+0.5bps), 20s -63.5bps (+0.5bps), 30s -67.125bps (+0.5bps).

New issues

• The Sydney-based NBN Corp plans a USD 144A 5y and/or 10y bond issue via BofA, Citi, JPM and MUFG.

   

• Danske Bank priced a $1.25bn 3y NC2 senior preferred benchmark via BofA, Citi, Danske, GS and TD.  A3/A+/AA-. +118bps.

   

• World Bank priced a $3.5bn 5y sustainable. Leads Barclays, Citi, HSBC and Nomura. Aaa/AAA.  SOFR MS +34bps.